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2022 (8) TMI 1015 - AT - Income TaxDisallowance u/s 14A - Disallowance of expenditure to extent of the exempt income - HELD THAT - CIT(A) has rightly restricted the disallowance to the extent of the exempt income. Significantly, in the case of PCIT vs. M/s. ERA Infrastructure (India) Ltd. 2022 (7) TMI 1093 - DELHI HIGH COURT had the occasion to examine the law on applicability of Section 14A having regard to the newly inserted Explanation to Section 14A as codified by Finance Act, 2022. The Hon'ble High Court held that the aforesaid Explanation cannot be presumed to be retrospective in operation. As a corollary, the law prevailing prior to the insertion of Explanation would continue to apply and shall not be guided by the Explanation being prospective. We therefore see no reason to interfere with the order of the CIT(A) which is in sync with extant law as expounded by judicial precedents. - Decided against revenue.
Issues Involved:
1. Disallowances under Section 14A of the Income Tax Act, 1961. 2. Application of Section 14A when no exempt income is earned. 3. Determination of expenditure incurred in relation to exempt income. 4. Retrospective applicability of the Explanation to Section 14A inserted by Finance Act, 2022. Issue-wise Detailed Analysis: 1. Disallowances under Section 14A of the Income Tax Act, 1961: The assessee challenged the disallowances made under Section 14A for the assessment years 2014-15, 2015-16, 2016-17, and 2017-18. The disallowances were substantial, with amounts ranging from Rs. 8.51 crores to Rs. 10.11 crores. The CIT(A) had disposed of all issues in favor of the assessee, stating that the investments were made in subsidiary companies for business purposes and not to earn tax-free income. The CIT(A) referenced the Hon'ble Jurisdictional High Court in CIT Vs. Holcim India P. Ltd. ITA No. 486/2014, which supported the view that investments made for business purposes should not attract disallowance under Section 14A. 2. Application of Section 14A when no exempt income is earned: The CIT(A) and various judicial precedents, including CIT Vs. Holcim India P. Ltd., CIT Vs. Hero Cycles Limited, and CIT Vs. Winsome Textile Industries Limited, held that Section 14A cannot be invoked if no exempt income is earned. The CIT(A) noted that the assessee had only Rs. 2,093/- of exempt income from a small investment in Punjab and Sind Bank shares, which was unrelated to the larger investments in subsidiaries. Thus, disallowance under Section 14A was restricted to Rs. 2,093/-. 3. Determination of expenditure incurred in relation to exempt income: The CIT(A) emphasized that the Assessing Officer (AO) must determine the expenditure incurred in relation to exempt income if not satisfied with the assessee's claim. However, since the exempt income was minimal, the application of Section 14A was limited. The CIT(A) cited several cases, including SA Builders v. CIT, which established that interest paid on borrowed funds used for business purposes is allowable as a deduction under Section 36(1)(iii). 4. Retrospective applicability of the Explanation to Section 14A inserted by Finance Act, 2022: The Hon'ble Delhi High Court in PCIT vs. M/s. ERA Infrastructure (India) Ltd. held that the newly inserted Explanation to Section 14A by Finance Act, 2022, is not retrospective. Therefore, the law prevailing before the insertion of the Explanation continues to apply. This judgment supported the CIT(A)'s decision to restrict the disallowance to the extent of the exempt income only. Conclusion: The appeals filed by the Revenue were dismissed, and the CIT(A)'s order was upheld, restricting the disallowance under Section 14A to Rs. 2,093/- for the assessment year 2014-15. The judgment followed the prevailing legal principles and judicial precedents, confirming that Section 14A disallowance is not applicable when no significant exempt income is earned. The Explanation to Section 14A inserted by Finance Act, 2022, was determined to be prospective and not applicable retrospectively. Order Pronouncement: The order was pronounced in the open Court on 02/08/2022.
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